Case project

02 F13 BUS-F301 Case Study 2 - Description and Requirements 1/3

BUS-F301 Financial Management Fall 2013, Class No. 14301 (Online)/ 14973 (Face-to-Face) Case Study 2: Cashflow Estimation and Capital Budgeting (Chapters 9 & 10)

Total Points

Total Points = 160 points; Due by Sunday November 17, 11:59 p.m. (ET); Submit to Assignments on Oncourse.

Please be reminded that in order to get the full points for the questions, you need to provide the correct answers, with relevant working (calculation(s) and explanation(s) etc.).

Please read the Case Study - Assessment Rubric which had been posted to Modules on Oncourse for the First Week (Week of August 26) before you work on this case study. Your case report (including the answers to the questions and the summary of the case background) should be well-typed using MS Office 2010 - Word and should be submitted to the corresponding tab under Assignments on Oncourse by the deadline. All your work must be submitted in a single MS Word file. Up to 25% of the case study possible points (i.e. 40 points) will be deducted if you submit your work otherwise. An embedded Excel file in your MS Word file will be considered the same as a separate Excel file submitted. So, if you embed an Excel file in your MS Word file, the same penalty will be given. All the answers as well as the case background summary, except the formulas, must be in your own words. Copy and paste sentence(s)/paragraph(s) from any source, except your own source, is totally unacceptable. Answers submitted in such a way will be subject to severe penalty.

For this case study, please study the Minicase of Chapter 10 on Page 341-342 of the textbook (can be accessed through Courseload eTexts on Oncourse) and the answers to the questions of the minicase (already posted to Modules on Oncourse for the Eleventh Week (Week of November 4). The minicase is a VERY CLOSE example for this Case Study 2. Please print the minicase from Courseload eTexts on Oncourse and its solution from Modules on Oncourse and study them well before you work on this case study. You can find the instructions on how to print the textbook pages posted under Syllabus on Oncourse.

Requirements: You have to provide (i) a brief summary (must be 350 words or more) (10 points) of the case background description

(in your own words) of this case study in the next page and (ii) the answer (in your own words) to each attached question. You should write up the summary before you work on the answer to any of the questions in this case study.

For the summary, I expect you to write in your own words summarizing what are presented in the case study. I want to make sure that you understand everything in this case study and what you are asked to do about it. Only when you understand what are presented and what you are asked to do, then you can do well. Right? I do not require you to mention anything about your findings (that is, your answers to the questions) in your summary. You are not expected to add anything new (such as your opinions, explanations etc.) to your summary. I just want to see whether you understand the case study and whether you understand the requirements or not. Therefore, you are expected to restate or summarize in your own words (350 words or more) the background description of this case study including what you are asked to do about it only. In your summary, you need to cover the information contained in the paragraphs there (about Stevensons Electronics, Inc.), the information contained in the questions and what you are asked to do by the questions. Thank you!

02 F13 BUS-F301 Case Study 2 - Description and Requirements 2/3

Stevensons Electronics, Inc. is a manufacturer of global positioning systems (GPS). Its current model is selling excellently. However, in order to cope with the foreseeable competition with other like electronic items, SE spent $650,000 to develop a prototype for a new GPS model that includes both features of the existing GPS model and some new features such as enhanced sounding, image for 3-D maps and speed for searching locations. The company had also spent a further $80,000 to study the marketability of the new model.

SE is able to manufacture the new GPS model at a variable cost of $245 per unit. The total fixed costs for the operation are expected to be $25 million per year. SE expects to sell 38,000,000 units, 22,000,000 units, 20,000,000 units, 15,000,000 units and 10,000,000 units of this new GPS model per year over the next five years respectively. The new GPS model will be selling at a price of $325 per unit. To launch this new line of production, SE needs to invest $64.5 million in equipment which will be depreciated on a seven-year MACRS schedule. The value of the used equipment is expected to be $2.5 million as at the end of the 5 year project life.

SE is planning to stop producing the existing GPS model entirely in three years. Should SE not introduce the new GPS model, sales of existing GPS model will be 30,000,000 units, 15,000,000 units and 11,000,000 units for the next three years respectively. The existing GPS model can be produced at variable costs of $115 per unit and total fixed costs of $30 million per year. The old GPS model is selling for $280 per unit. If SE produces the new GPS model, sales of existing GPS model will be eroded by 8,500,000 units per year. In addition, to promote sales of the existing GPS model alongside with the new GPS model, SE has to reduce the price of the existing GPS to $200 per unit. Net working capital for the GPS models will be 15 percent of sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC required. The first change in NWC is expected to occur in year 1 according to the sales of the year. SE is currently in the tax bracket of 40 percent and it requires a 20 percent returns on all of its projects.

Your company has just been hired by SE as a financial consultant to advise them on this new GPS project. You are expected to provide answers to the following questions to their management by their next meeting which is scheduled sometime next month.

1. What is/are the sunk cost(s) for this new GPS project? Briefly explain. You have to tell what sunk cost is and the amount of the total sunk cost(s). In addition, you have to advise SE on how to handle such cost(s). (5 points)

2. What are the cash flows of the project for each year? (95 points) 3. What is the payback period of the project? Should it be accepted if

SE requires a payback of 3 years for all projects? (10 points) 4. What is the PI (profitability index) of the project? (10 points) 5. What is the IRR (internal rate of return) of the project? (10 points) 6. What is the NPV (net present value) of the project? (10 points) 7. Should the project be accepted based on PI, IRR and NPV? Briefly explain. (10 points)

02 F13 BUS-F301 Case Study 2 - Description and Requirements 3/3

Important Reminder

“If you choose to turn in a late case study, you will lose 25% of the points for each day past‐due for  that case study. Penalty will be given  immediately after the deadline. As  I need to return the case  study and post the answers to the case study, no case study will be accepted for grading after 4 days  past‐due” ‐ 4‐day penalty rule. It is your responsibility to make sure that you do turn in the case study  and submit the right case study file when you turn it in. Please make sure that you check to get this done  by the deadline. You are required to save frequently at least one backup copy of the case study before  you submit it. Past‐due submission because of computer crash, misplacing of your memory stick (jump  drive)  or  failing  to  submit  the  correct  file  by  the  deadline  will  be  penalized  according  to  the  above‐ mentioned 4‐day penalty rule.